More on the West Coast Rail Franchise, FirstGroup and Richard Branson

Coming back to the decision last week to award the West Coast train contract to FirstGroup rather than Virgin, we had some interesting comments on our initial post. Unlike most of the media who seemed to be swept up in the usual Richard Branson mania, we set a challenge of asking how the process could have been run better.

Roger Newman took us up on that and suggested that First Group walking away from a previous franchise should have counted more strongly again them.  “In May 2011 First Group informed the government of its intention to utilise the break point in its franchise agreement to terminate the Greater Western franchise in April 2013..”

Here is Newman’s suggestion:

Even though what First Group did was totally legal, I think that the general population would be very uneasy about the idea that a company could do this and then be allowed to bid for further business. Perhaps the legal advisors to the procurement team would have vetoed the idea but how about a simple question in the PQQ along the lines of: ‘Have you ever handed back a franchise early or used a contractual breakpoint to avoid paying the Government revenue that you jointly forecast when bidding for the franchise?’

I do have some sympathy with that view. However, I suspect the problem is this. My understanding is that walking away from the franchise was something that was allowed in the contract. Franchisees had an option to do that. So if the buyer has, in effect, said that this is acceptable, it is then difficult to use the fact that a supplier did follow that route as a negative factor in a subsequent competition.

What I don't know is how the contract has been changed in the case of this franchise. Could First walk away again if their projections for growth, on which their business model depends, turn out to be optimistic? One would hope that Department for Transport have learnt something from the previous cases, and made pulling out during the franchise period an extremely unattractive option commercially. I’ve read that the penalty this time is £265 million but I’m not clear if that is correct.

Other comments from readers were focused on the speed at which DfT carried out such a complex evaluation. That’s an excellent point and one I hadn’t picked up. However, I suspect there was a fairly substantial team working on this, so it’s not impossible to do a good job in three months. Here’s Final Furlong:

It states in the ITT that the page limit for the ‘Executive Summary’ in Bidders’ submissions was 1500 pages!! ‘War and Peace’, at 1446 pages, has fewer pages…

Somehow, they read, absorbed, evaluated, scored and negotiated these massive submissions in a three month period (May to July) while setting aside the whole of August to take it through governance (Secretary of State consent), presumably, while most of Treasury, ERG et al were abroad on their holidays. Just four months for mobilisation of a 14 year train franchise.

Some readers pointed out that if Richard Branson wasn’t happy with the process, he could have raised that earlier – and he can formally challenge rather than going on a PR offensive.  As Dan said, putting words in Branson’s mouth:

“we’ve lost out on more business and you’re all going to suffer for it! We are clearly the best choice, but those damned procurement people, with their ‘rules’, are just getting in the way of the right decision being made by the people we’ve been buttering up for months! Well yes, I suppose it does mean that our bid wasn’t as good. Yes, it probably would have cost the taxpayer more, but what’s that got to do with anything?”

So, if you’re interested in the topic, do take a look at all the comments here – and thanks to everyone who contributed.

Voices (7)

  1. Clark Kent:

    What remains curious to me is the relationship between the franchise fees and then what is stated about how the operating company is then required the operate within an agreed structure for fare increases.

    the ITT seems structured on the basis of maximising the fees at the expense of any benefit to the customer in terms of the fares they pay – provided you can live within fare increase thus, what are you prepared to pay as the fee.

    one seems to forget that these trains are still a public service. if the trains had still be in public hands, the latest ask of them would have been simply to reduce their operating cost by 30%.

    it’s unusual then that the fare strucuture is explained from the outset on the basis of managing within a predefined structure of fare increases, rather than a presumption of bringing the cost to the consumer down.

    when you travel with virgin, the only thing you are guaranteed as part of the service, is that there will be a train (or a replacement bus) at some point to get you from a to b. all the frills in relation to complimentary meals and wifi in first are just that – complimentary. if they dont work, you have no recourse provided the train still runs. and unless you are canny about booking, the base price for the ticket is still £300+ from Preston to London. Standard class is not much better. So let’s not kid ourselves that the Virgin serivce, was that great in value terms. If your wifi worked, if you got your breakfast, if the boiler was working which meant you can buy a cup of tea, these are all fringe benefits over what they are obligated to provide for the ticket holder.

    it seems to me that the fault – and why branson’s objections are so disingenuous – lies with the structure of what was asked of bidders. bidders were asked to make bids for which the ultimate beneficiary was the network and the treasury, when in the end its the train user who loses out whoever picks up the franchise.

    i understand there is a need to fund infrastructure improvements, but the thrust here has been to maximise that at the expense of the customer.

    the old adage “it doesn’t matter who you vote for, the government still gets in” applies equally here to the train operators.

  2. David Orr:

    Why not spend all this tendering and regulatory money (“bureaucracy”) on trains and railway stuff for the passengers!

    There is a point of view (look to France & Germany) that says that only the state will invest over long periods of time: 10, 25 or 50 years.

    So, should key social infrastructure, that is Nationally strategic, be in state (“our”) hands, rather than these dubious & contrived markets?

    Huge sums that could eb used to fund the service are wasted in tendering, “regulating” (used in the loosest sense), “playing shops” between the artificially divided contrived market (in this case trains, tracks, signals, stations, train builders, train lessors, maintenance etc)?

    All of these contrived markets (think energy, trains, water with roads & academy school groups coming in future) move predictably towards cartel or even a form of monopoly (of supply not the board game).

    And our train fares are 30% higher than the state model across Europe and who would describe the UK rail service as “world class”?

    Wow – I have made a post and managed to get to the end without mentioning IBM or SW1 and the wasted £many, many millions here in Somerset.

    But then I could mention that IBM paid only 7% tax on their UK £billions of money made from outsourced public services paid for by us taxpayers. Had IBM (and many others – Google, Vodafone etc – what about First & Virgin?) paid the same rate of tax as the lowest paid (20%), then maybe UK PLC could afford better infrastruture and pay off some of the debts from the banking crisis and recession that followed it.

    Read all about it here:

    http://www.dailymail.co.uk/news/article-2190130/How-IBM-manages-pay-just-7-cent-tax-despite-billion-pound-profits-government-deals.html#ixzz23uyirG8C

    1. Roger Conway:

      Mr Orr makes significant and accurate points.
      He could have also added that by ‘outsourcing’ not only does the long suffering tax payer lose out on income, but the cloak of ‘commercial in confidence’ descends to block off any public questioning via FOI etc and no one will ever know what ‘dirty deals’ might have been brokered between public officials and their multi-national contractors.

  3. life:

    It’s not just the time, it’s whether the team have collectively, the skill, experience and knowledge to undertake such an important piece of work. Obviously they would need a very broad skill and knowledge set across a number of disciplines, and I wonder whether all this was in place and co-ordinated enough to cover the bases in such an incredibly short timeframe. And in some ways throwing more people at it to compensate would make it worse.

    Even with the right team in place the organisation would have needed to be very thorough, and I suspect itself would have taken some time. Which it might have done. Who knows, maybe they’ll be proved to have made the right decision, but from the press and (more trusted) comments here the shape of the thing looks a bit suspicious.

  4. Home Straight:

    Apparently DfT allocated 4 hours a plan for their experts to judge them – average length 150 pages. In practice people take the plans home and spend longer, but still, you could hardly describe the process as rigorous. The majority of time in those 3 months is spent doing nothing.

  5. Final Furlong:

    While we haven’t been exposed to minutiae of the bids, I do recall Dick firing his initial shots (from his Virgin Island, via Skype, poor chap) at the process, specifically, the main difference between the two submissions. He said that First Group had offered to pay Treasury an additional £2bn in income (compared to Virgin’s bid presumably) in the last two years of the 14 year contract. Now, if what Dick has said is true (taking aside Dick’s understandable bitterness), then I sense that we will see First Group break another contract – probably sometime in the 11th year. I also heard on Radio 4 that the ‘performance bond’ in the proposed contract is only £45m (to cover the cost incurred by Treasury if they have to re-let the contract should it fail or be curtailed at some stage during the 14 years). Now, to conclude, let’s simply do the maths: in the last two years, £45m versus £2bn…

    1. Rob:

      Extract from the ITT:
      4.3.2 Evidence
      “……evidence is required of deliverability of the specific plans presented for the new franchise, which may be in the form of relevant examples from other operations. The more ambitious the improvement offered by the Bidder or the more innovative its approach, the greater the need for evidence to support the bid….”

      Makes you wonder.

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